Olafur Ragnar Grimsson, Iceland's president, rejected a bill on Tuesday that would compensate both governments.

He said he had decided to put the issue to a public referendum instead, angering British and Dutch officials.

International obligations

But Grimsson insisted on Thursday that Iceland would live up to its international obligations, despite his veto.

"Iceland fully recognises its obligations and responsibilities to pay ... and (what) will be put to a referendum is simply in what way and in what forms and in what terms," he said in an interview with Swedish Radio.

Meanwhile, officials in Iceland said that the standoff would not affect relations among the countries.

Ossur Skarphedinsson, Iceland's foreign minister, said he has received assurances from Britain that the issue also would not affect Iceland's candidacy to join the European Union.

"Iceland fully recognises its obligations and responsibilities to pay..."

Olafur Ragnar Grimsson, Iceland's president

"I have spoken to Foreign Secretary (David) Miliband and I have his permission to state officially that this will not affect the EU application," Skarphedinsson told Reuters.

Britain and The Netherlands have veto power over the membership bid.

The compensation bill has sparked anger in Iceland, which was hit by a financial meltdown in October 2008.

About 60,000 people - about one-quarter of the country's electorate - have signed a petition protesting against the bill and calling for the issue to be put to a referendum.

Icesave was an online subsidiary of Iceland's Landsbanki bank, which had to be rescued in October 2008 as the global credit crunch hit.